Experienced California Attorneys Fighting REIT Investment Fraud
The popularity of Real Estate Investment Trusts, or “REITs”, has greatly increased over the last few years. REITS have also been receiving increased scrutiny from FINRA and SEC over their marketing practices, which tout the supposed low risk and high yield of this investment. Many investors have in fact reported issues, particularly with non-traded REITs, including an inability to withdraw their investment from a REIT as a result of REIT fraud.
If you put money into a REIT and subsequently lost substantial money, stopped receiving distribution payments, or have been unable to exit the investment, it may be possible that you were victimized by a fraudster. The lawyers of Girard Bengali, APC, are experienced in handling arbitrations and lawsuits involving REIT fraud. We encourage you to reach out to our firm to discuss what legal options you may have.
What is a REIT and How Does it Work?
A real estate investment trust is a company that earns income from owning or financing various types of real property. Most REITs purchase assets as part of their own investment portfolio, and people who buy shares of that REIT benefit by earning a share of the income produced by the properties owned. The REIT could own nearly any type of real estate, such as commercial office space, apartments, cell phone towers, hotels and nearly any other real property.
To qualify as a REIT, the company must invest at least 75 percent of its total assets in real property that generates income and distribute this income to shareholders. Many REITs are perfectly legitimate and operate very well, offering investors an opportunity to diversify their portfolios. But other REITS, usually the “non-traded” variety, can be dangerous.
What Are the Dangers of Non-Traded REITs?
Publicly traded REITs are not without flaws, but because they are public they are typically more sound, transparent investments. Much the fraud that happens with REITs occurs in the non-traded REIT world.
Brokerage firms and investment advisors have a duty to explain the dangers of non-traded REITs before recommending them to a client. This is similar to the duty owed when recommending a private placement offering, which is also a non-public investment that can be used to defraud investors. Some of the more common risks associated with non-traded REITs are:
- Large up-front fees: Up-front fees for non-traded REITs can be as high as 15 percent, which is far higher than the 7 percent typically charged in publicly traded REITs. Brokerage firms and advisors have a duty to explain this issue and make sure the investor understands there are other investments out there with far lower commissions and fees. Unscrupulous advisors may push investors into expensive REITs to generate income for themselves.
- Instability: Advisors may claim that non-traded REITs are stable and safe, but the SEC and FINRA disagree.
- Unclear property ownership: Properties owned by non-traded REITs are often not identified. Instead, they are part of a blind pool, which means investors have no way of knowing what assets they are actually investing in.
- Restrictive and expensive redemption: REITs often have hidden provisions limiting the number of shares that can be redeemed before liquidation, along with very high redemption fees.
- Conflicts of interest: Non-traded REITs are generally run by external managers who get paid on asset-based fees and incentives. The managers are often affiliated with the sponsor(s) of the REIT, so the manager may care more about the sponsor than the investors, which is a conflict of interest. Transactions between related parties are also common.
- Valuation and tax issues: REITs and non-traded REITs are notoriously difficult to value because of the constant fluctuation in real estate prices, and they have many special tax considerations that are highly technical in nature.
All of these items, and others not mentioned, are dangerous for investors because they encourage those who offer non-traded REIT investments to engage in self-dealing ꟷ doing things that financially benefit themselves at the expense of investors.
REIT fraud is common, but often not discovered by investors until substantial losses have been incurred. When fraud is discovered, it takes skilled, sophisticated lawyers to dissect the REIT, trace the transactions, and get money back on behalf of the defrauded investors.
Reach Out to Our California Securities Fraud Attorneys Today
Girard Bengali, APC, is home to a dedicated team of lawyers and staff who focus on complex securities arbitration and litigation, including cases involving REIT fraud. With offices in Los Angeles, Newport Beach and San Francisco, we serve clients throughout California and nationwide. Call 866-778-6821 or contact us online to arrange a free confidential meeting with our attorneys to discuss your specific situation and how we may be able to help.